Category Archives: Japanese candlesticks

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Analysis and Outlook for the QQQ (Nasdaq 100 ETF):

The Qs are rebounding sharply from their Christmastime low to today’s high. We see shorts getting squeezed and the weaker hands being weeded out. Tech stocks have steadily moved through resistance to reach higher levels of supply. In the aftermath of December’s waterfall decline, they’ve driven a good distance up in a short amount of time.

A big boost in central bank balance sheets, in large part courtesy of stimulus by the People’s Bank of China, has pumped in the liquidity needed to stave off impending disaster for investors. The key question now is, “How high are we going to go?”

The term ‘fractal” was coined by mathematician Benoit Mandelbrot in 1975. Fractals are simply defined as never-ending patterns that repeat at different scales. Their property is known as “self-similarity.” Although fractals are very complex, they are made by repeating a simple process.

Fractals are found and applied in: math, science, nature, art, architecture, music, the stock market, and more. Arguably, fractals appear in all human pursuits, throughout the natural world, and the universe.

Mandelbrot studied financial markets and used a computer to analyze cotton price movement. This led him to develop “fractal geometry” and the “Mandelbrot set.”

As Mandelbrot wrote, in his introduction to The Fractal Geometry of Nature (1982), “Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line.”

Markets may appear chaotic and rough. I like to say market prices don’t travel along a one-way street. Often, a familiar road map to price movement can be found. Sometimes the market’s moves are natural and sometimes they are not. I view it as an exciting and never-ceasing endeavor to catch the market’s twists and turns.

Technical analysis is a combination of art and science.

Human behavior (buying and selling) drives market price movement. That is why Options Hotline uses Japanese charting techniques. We use our charts to vividly reveal the human behavior behind headline numbers and help you stay a step ahead of the crowd.

We combine Japanese charting techniques with the best of western technical analysis. The addition of pattern recognition and the Superleverage power of options, to play the probabilities, and now we’re talkin’ sensible speculation.

A week ago, I posted my Analysis and Outlook for the S&P 500 (SPY). The venerable index was rallying off its Christmastime low and I was anticipating where and when the balance of power was likely to shift. At the time, I was on lookout for a turn. That watch is now heightened. Here’s my update.

As you can see on my daily candlestick chart below, SPY is reaching technical resistance. Bulls could be slowing their roll.

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”
— William Feather

Differing opinions make markets. The battle between bulls and bears is a daily struggle for control of price direction. Our method focuses on the human behavior (including computer-driven algorithmic trading) of buying and selling. That is what ultimately drives price action.

Combining the best of western technical analysis with our expertise in interpretation of Japanese charting techniques, we study the character of the behavior of of market price movement (positive, negative, or indecisive). We strive to identify which side has the advantage, along with when and where the balance of power is likely to shift, to help us stay a step ahead of the crowd.

This morning, SPY (S&P 500 ETF) continues its rebound on light trading volume. Buyers are following through from Friday’s strength, extending their immediate-term edge. But until proven otherwise by price, this may be considered a countertrend rally. Sellers are laying in wait.

Volume indicates the force behind a price move. Low volume questions the staying power of this action. Where can we expect sellers to be enticed?

On Thursday, stocks slid and investors fled to the perceived safety of US Treasury bonds. Bond prices rose sharply. Because bond prices move inverse to interest rates, that pushed the 10-year yield down to a paltry 2.54% (see chart below) and inspired this morning’s quote from one of our founding fathers:

As the stock market’s decline intensifies, one wonders what central bankers will do. Will they coordinate to take down the US dollar? Their objective would be to boost their balance sheets and pump out enough liquidity to prop up ailing share prices.

Will Treasury Secretary Munchkin Mnuchin again call the PTT (Plunge Protection Team)? Stocks are sliding hard. It will likely take a sizeable sovereign effort to turn the state of the market.

As you can see above, depicted on a nice NYSE monthly chart by Chris Kimble, the market is facing an important test of support (demand).

“The four most dangerous words in investing are, ‘This time it’s different.’”

— Sir John Templeton

In trading, it’s especially important to keep your emotions out of it and trade what you see. Make a plan and use it. Have the flexibility to listen to the message of the market, even if it’s not what you were expecting.

There is only probability, never certainty; but, indeed, patterns can be powerful.